Wealth Clarity Blog

Guest Blog provided by Richard Beaton & Linda Wagener of Marigold Associates.

Over the past several weeks, we discussed the value of using deliberate training strategies such as allowances and budget management to teach children financial skills. In this segment we’re going to tackle the problem of how to form our children’s attitudes toward money and work. These are rarely shaped simply by education. They are rooted in the basic practices and habits of family life.

You may have heard the phrase “shirtsleeves to shirtsleeves in three generations.” It refers to the fact that often a person’s attitudes toward money and work can be traced to where they are in the family wealth cycle. Those in the first generation of affluence learned how to earn and manage money because they had to. There were no family funds to buy them everything that they needed, wanted, or thought they wanted. They had to work to pay for any extras and even in some cases, the necessities, like clothes. If they wanted a college education, they had to take out loans and work part time. By the third generation, the work ethic has often declined to the point where the accumulated wealth of the family is depleted by a generation who has learned to be consumers rather than creators of wealth.  But it doesn’t have to play out this way.

We interviewed a member of a fourth-generation family of wealth who illustrated this pattern clearly. His side of the family had continued to live productive lives. Their wealth had increased in every generation. Another branch of the family, the “country-club cousins,” had burned through their inheritance. Their kids would be back to shirt-sleeves. The difference? He pointed out the window to an 8-year old neighbor kid, mowing the lawn across the street. “See that kid? His family is worth millions. But they live modestly, and expect their kids to work as soon and as hard as they are able. See that other kid next door? He’s 16 and has never held a job. His family doesn’t have the wealth of the other, but probably never will.”

In our work with entrepreneurs and families, we have heard variations on this story over and over again. The families whose children grow up to be hard-working productive contributors are expected to work and be responsible, just like everyone else. They live comfortably but modestly. They also recognize that their wealth is a responsibility, not a privilege. It is to be used for good, not for pleasure.

Five Things You Can Do to Teach Your Children to Handle Wealth Wisely

1. Let them learn the joy of working hard and the reward that follows. It may be tempting to think that schoolwork is enough to accomplish this, but schoolwork has sadly become more about performance achievement. In contrast, work contributes to the well-being of others and is a piece of a larger enterprise.
2. Never use money as a reward for achievement such as grades. Such practices teach kids that money is the only reward that matters, and they distract them from the intrinsic pleasure of doing well.
3. Live modestly. This is often very difficult for those who want to enjoy their wealth. One entrepreneur we interviewed came from significant poverty and loved the lavish lifestyle he was now able to afford. The children of his first marriage had blown through every cent he had given them. He didn’t want the same thing to happen to the kids of his second marriage, yet he couldn’t give up the ostentatious lifestyle. Eventually he had nothing left to pass on.
4. Be wise with your inheritance strategy.Let your kids know from an early age that they will be expected to work and live responsibly. Make a commitment to yourself that you won’t give large sums of money to adults who have not demonstrated the capacity to use finances wisely. 
5. Don’t use your wealth to protect your kids from the harsh realities of life. Admittedly, this is difficult for any parent, but your children need to be exposed to those in need in order to build their sense of empathy and gratitude. You can build their hope by demonstrating how your wealth can make a difference in the world. Involve them early in giving back through hands-on service in their community. There are many excellent organizations that provide opportunities for young people to develop their skills. Social Venture Partners (Seattle) is one good example.

There is little in life as satisfying as seeing your children flourish in their lives; delighting in their life’s purpose. Whether they end up with modest or robust incomes, they will need to know how to work hard and manage their finances. As parents you can make a significant difference through financial education and creating a family environment that forms their character and values.

A big “thank you” to Richard Beaton and Linda Wagener of Marigold Associates for guest blogging.  Feel free to contact them directly if you have questions or need more information.  As a reminder, we are hosting a luncheon on February 15th to hear more about the subject of Kids & Money from these two experts.  If you have an interest in learning about the event, please contact jessica@highlandprivate.com.

As we are heading into the typical year end giving season, fraught will all kinds of traditional philanthropic complexity, I wanted to pass along a lesson I have learned in my own giving: 

Consciously checking my motives to make sure the giving is about the give-ee (recipient) and not about the give-or (me and you). 

There are plenty of examples of wealthy families and individuals that give large gifts to get recognition in some form, or their name on a building, or control the impact of the gift. I find it easy to dismiss those actions as:  I would never do that because I’m not that egotistical or narcissistic!

I wish all my giving was altruistic but realistically it’s just not the case; however, there are a bunch of subtle issues, that when I’m really honest with myself, influence how and why I give. 

For example, there are times the giving is about making me feel good; wanting to be in control, gaining approval from someone, and being seen as significant.  The dark side of giving takes roots in these quiet moments of reflection where only “I” can judge my true intentions and motivations. 

One check and balance to apply to your giving is to consider making more of your gifts in the purest form = anonymous.  Gifts in this form can take away the control and impact I want to bundle together with my gift.

Another possibility is to embrace the planting and harvesting giving concept.  Using this clearly farming metaphor, there are times when the gift is about planting and we may not be able to see the fruits of our giving for many reasons.  In other instances, someone else may have contributed greatly to the early stages of planting and we get the blessing of seeing our gift bear all kinds of fruit.  I have found the more I try to control whether I’m a planter or a harvester, or both, the more the giving becomes about me.

Finally, before you write any checks–or gift appreciated securities–this year end, take the following quick emotional inventory:

1. Am I okay if I don’t get recognition for the gift?
2. Am I more concerned about the person or organization in need or the giver? 
3. Should this gift be made anonymously?
4. Am I okay not controlling the outcome or the harvest, instead being one of many to move the ball further down the field?

What other giving issues or emotional effects of giving have you experienced that could be helpful to share?

If you think getting a loan secured by your home, either a home equity or first mortgage is a piece of cake it might be time to think again.

Over the past several months I have run into several client scenarios where the assumption was that getting mortgage financing for a new home, or to refinance an older mortgage, was a no-brainer. In two recent cases loans were denied where there was significant income (i.e. north of $250,000 per year) and plenty of liquid assets (i.e. well over $2 million); one client is a senior executive at a major technology company.

You might be saying, huh?

Well, in the brave new world of banking, it is more prevalent than you might believe. To get the bottom of the story and why it is happening with increased frequency, I contacted my good friend Robert Wuflestad, who is a very experienced mortgage banker, for some answers.

So, Robert, what is going on right now in the banking world that’s causing so many wealth creators grief?

The simple answer to this question is the industry is still in recovery. The fed is propping up conforming and government loans, but the mortgage crisis virtually wiped out the secondary market for Jumbo mortgages and non-conforming mortgages. Without this secondary market, there is little choice or competition and borrowers are limited to the institutions that have money to lend. Since many of these institutions are still trying to recover from their own problems, they are only willing to lend if they are certain there is little risk AND they are going to make a profit. This gets rather silly at times especially with the big banks because they can be extremely rigid in what they will allow. Competition is emerging and there are some attractive programs available through institutions other than the big national banks, but borrowers must still be able to document income and assets, common sense has been abandoned. Credit scoring can be challenging and you must manage this prior to entering the market.

It appears to me that high levels of assets, even if they are liquid, no longer matter. Is that right?

To get the best rates, if you have the required minimum of assets, generally it doesn’t matter how much more you have. You still must meet the required income, credit and property requirements. The idea of “common sense” guidelines have died, may it RIP.

There are a few regional banks that will lend on the strength of the borrower, but rates may be a bit higher, but even they have to be concerned about new regulations designed to protect borrowers from predatory lending and putting borrowers in position where their income cannot support their debt.

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In a recent post titled Moving from Success to Significance, I wrote about some of the key considerations when shifting your life from a journey of success to a journey of significance.  Making this shift requires action, but unfortunately, many wealth creators get stuck along the way.

The major barrier to a life of significance is Complexity.

Two Challenges of Complexity

First, wealth—especially increasing wealth—will naturally create a heightened level of complication in your life.  You tend to worry more, have less time for the things you truly love, and desire more control and simplification.  But, at the same time, you aren’t sure what options you have that will allow change to occur.  

Secondly, when you’re in the middle of wealth complexity you don’t know what you’re missing: you can’t see it. 

The base that will allow you to fully experience significance is Wealth Clarity.

In many ways, wealth clarity is the bridge that crosses the chasm from complexity to simplicity.  It frees you to think and to enjoy life in a more meaningful way.  It builds confidence because you can manage your financial life more easily and respond to changing assumptions and life circumstances in stride.

The sad truth is that 90-95% of wealth creators live a life of wealth complexity. 

In my next post I will focus on the consequences—impacts and costs—of not having clarity and what you can do about it.

 There have been some major changes to the federal estate tax laws this year.

Laws passed several years ago went into effect recently and repealed the federal estate tax on January 1, 2010, and then will reinstate it in 2011 under very different rules.  Our legal friends at Howard Rice have created an excellent summary of the issue and potential considerations.

In short, 2010 is an interesting transition period where nobody has clarity about what to do because it was widely expected Congress would have implemented some type of permanent legislation by now.  It’s still possible something will be enacted later this year, and it may be applied retroactive to January 1. 

In fact, I was an attendee at the 54^th Annual Washington State Bar Association Estate Planning Seminar this past fall that was attended by well over 500 attorneys, CPAs, and other professional advisors.  A show of hands from this room full of professionals overwhelmingly predicted that Congress would take action before the end of 2009 to “fix” this issue, if for no other reason than because the U.S. Government needs the tax receipts.  It just goes to show you that even the legal community is having a difficult time gauging the direction this will ultimately go.

At this time, there continues to be quite a bit of speculation regarding how it will get resolved.  All of this uncertainty means there could be interesting planning opportunities, depending on your circumstances. 

It is very important that you review any estate planning strategies with your attorney before taking any action.